The Motley Fool

Should you invest in Bubs Australia shares?

November has been a big month for Australian infant nutrition product manufacturer Bubs Australia Ltd (ASX: BUB). The company announced 2 potentially lucrative new deals this month: one with Chinese e-commerce giant Alibaba, and the second with Vietnam’s largest baby products retailer, Bibo Mart. Growth investors will be left disappointed though: despite these 2 big announcements, the company’s share price has barely budged.

What do these deals mean for Bubs?

On paper, both deals look like big wins for Bubs. The deal inked with Alibaba is part of a broader push by the Chinese company to help international brands enter the Chinese market. As part of the strategic agreement, Bubs will launch a new premium adult goat dairy brand called “Deloraine”, which will be distributed across Alibaba’s online marketplace. The deal gives Bubs access to over 700 million active users and the company expects to ship $10 million worth of its goat dairy products in the first year of the agreement. According to Bubs’ announcement, the market for goat dairy products in China is estimated at $2 billion, so there is the potential for rapid revenue growth.

The deal with Bibo Mart in Vietnam represents a significant milestone for Bubs as it continues to expand its footprint in Asia. The market for infant nutrition products in Vietnam is estimated at $2.2 billion annually and it is one of the fastest growing markets in Asia. Through the deal, Bubs’ products will be available in Bibo Mart’s 135 stores across Vietnam as early as December. Baked into the agreement are revenue targets of $1.5 million for the first year and $2 million for the second, with the condition that the 2 year distribution deal can be terminated early if these minimum sales targets are not met.

Combined, these deals represent almost a quarter of Bubs’ FY19 gross revenue of $46.8 million, and could offer the potential to drive significant revenue uplift for the company over the next 12 months. It also positions Bubs favourably against more established rivals like Blackmores Limited (ASX: BKL), whose Chinese strategy has so far failed to deliver results.

Given all this, many shareholders will be left wondering why has there been no real reaction from the market in response to these positive announcements.

Why has the market reaction been so lacklustre?

In my opinion, this is symptomatic of broader issues inherent in pursuing a growth investment strategy at the moment. This strategy relies on fundamental expectations about the future state of the economy. When the economy is chugging along without any signs of major roadblocks on the horizon, investors will have more confidence betting on a young company succeeding. If, however, an unpredictable US president is being threatened with impeachment, international trade wars are still simmering, Hong Kong is falling apart, and there are still real fears of an imminent global recession, investors may not be so willing to lay their hard-earned money on the line.

So despite the fact that Bubs has quickly grown its revenues and has had proven success selling its products overseas, it has still yet to post a profit in an increasingly challenging global economic environment. And investors just don’t seem to have the risk appetite for that right now.

Foolish takeaway

There is of course a flip side to this if you are happy to take on that risk. When the economy starts to show signs of a recovery and forecasts become rosier again, the share prices of rapidly growing companies like Bubs will potentially gain the most benefit. Capital will flow back into the equity markets and growth investing will come back into vogue again, pushing up the share prices of growth stocks like Bubs. However, it does mean that in the meantime shareholders will have to show some extra patience as they ride out these bumps in the global economy.

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Motley Fool contributor Rhys Brock owns shares of Blackmores Limited and BUBS AUST FPO. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. The Motley Fool Australia has recommended BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.